Learn about Invoice Factoring and Account Receivable Financing

Consumer CollectionsRunning a company is not as simple as selling items and services and waiting 1 to 2 months for your customers to pay back. Though large and well-established companies can usually handle this protracted time frame, smaller businesses that have greater financial limits cannot afford this waiting period. To avoid these delays that can impede your business operations, one should make use of invoice factoring. So what is invoice factoring? And how does it work?

Generally, invoice factoring, also termed as accounts receivable financing, is a tool that enables small company owners to take control of their gradual paying invoices. Invoice factoring enables you to convert your invoices into instant cash. Though it is not a well-recognized fact, invoices from reliable and reputable credit-worthy commercial businesses and customers can serve as great collateral, particularly for factoring firms. Though many banks and financing companies will not accept invoices, factoring firms are very willing to offer you financial aid taken.

Compared to many banks that provide cash loans against strict collateral requirements, invoice factoring firms purchase your invoices straightforward. The factoring firm purchases your invoices and provides you with finances right away. Then, they will wait for your clients to pay them. To best describe the process of factoring, here is a good example:

Let us assume that you sell products to Company A and B. As soon as you offer the products, you will invoice them. In the same time, you send the invoice copies to the factoring firm you're working with. They will assess the copies and if it is valid, they'll immediately purchase them and provide you with an advance premium for the invoices. The factoring company will wait to get paid by Company A and B. Once it is compensated for, any remaining cash is given back to your business. This process can be repeated multiple times as long as you have invoices. This offers you a flexible line of financing that develops with your business.

The expenses for employing factoring services can be assessed with the use of three factors. First, the credit worthiness and reliability of your business clients. Second, the duration of time that the invoices will be paid for. And third, the monthly factored amount. Your expenses, also known as a discount, can range from as low as 1.5% to as high as 12% for every given transaction.

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